Friday, 29 June 2012

Has the property market bottomed out?

Whisper it, but is it time to suggest that the property market has finally bottomed out? I say, whisper it, because that is what some American commentators are beginning to suggest. And we all know the old truth: if it happens in America, we can pretty well guarantee it happening here in the UK. One guess is that the hardest hit housing markets in the UK could still see some decline, but the bottom is very close elsewhere. It is worth remembering that when prices hit bottom, they tend to bounce back with some energy – rubber ball syndrome! There are at least three reasons to show some optimism for property prices – 1 - Take repossessions (by banks and mortgage lenders). In a lot of cases it is now cheaper to buy a repossessed house than it would be to rebuild the original. There is a key principle at work here. A residential property “hits bottom” when the selling price is lower than the cost to build originally. It’s just about the best possible deal you can get – and if it’s a particularly nice home in a good ‘location’, then you could be quids in. As always, demand is the key when it comes to moving housing prices and there are enough green shoots out there to suggest that demand is on the up. 2 - Prices are finally so low that cash flowing for rental is viable again as a property investment and retirement strategy. History tells us that the housing market boom ran prices up so much that landlords found their ownership costs often outstripping their cashflow from rentals. In short, they could not raise their rents high enough to support higher property prices. Today, the low selling prices of properties are easing the worries over cashflow for landlords. The rental property market may not be quite at the “cooking on gas” stage, but a more positive cashflow is starting to cheer the market. 3 – Most encouraging for landlords is the ability to generate equity on day one. When purchase prices are low, there are a variety of benefits to the property owner. Equity is the difference between what you owe on your mortgage, and the total market value of the property. Just taking a repossessed, vacant or very cheap property and putting it back into service will add instant equity. If you can manage repair and maintenance costs, then you should be on a winner. So, as I said at the start, whisper it – but the bottom line for smart home buyers and investors may suggest that this is the housing market we have all been waiting for . . .